Variations On The Home Income Plan Theme

Variable interest plans These work like the plans already described, except that the rate of interest on the mortgage rises and falls with the general level of interest rates. The income (before interest has been deducted) from the annuity is fixed, so a rise in the interest rate reduces the amount of income you're left with. Most people should avoid these plans.

Plans linked to other investments Some home income plans don't use some or all of the mortgage loan to buy an annuity. Instead, some or all of the money is invested in single-premium insurance bonds ). You can't be sure how much money you'll get from the bonds (as this depends on investment returns) and interest on the mortgage doesn't qualify for tax relief. Avoid these plans.

Variable interest lump sum plans With these, the proceeds of the mortgage provide you with a lump sum instead of an annuity. You can use the money to buy an annuity if you like, but you're then stuck with a fixed income and a variable mortgage rate, so you can't be sure how much income you'll be left with. If you don't buy an annuity, interest on the mortgage doesn't qualify for tax relief. These plans are available to younger people - 60 and upwards - than other home income plans but an annuity will provide a relatively small income unless you're at least 65. Most people should avoid these plans.

Rolled-up interest schemes With these, none of the interest on the mortgage is paid until you die. It's 'rolled up' and repaid along with the loan out of the proceeds of the sale of your home. These plans are risky because the interest mounts up quickly and you can find yourself reaching the limit of borrowing allowed by the lender you'll then have to pay interest (or, at worst, even sell your home). Also, the rolled-up interest doesn't qualify for tax relief - the taxman argues that you can't get relief after you're dead. Many organisations have lobbied the government to change the law to allow tax relief on rolled-up interest but so far without success.

WARNING Avoid home reversion schemes. These aren't loan plans. With reversion schemes you sell your house (or part of it) in return for either a lump sum or an income for life plus the right to continue living in the house for the rest of your life. You have to be 65 or more and you remain responsible for maintaining your home. With nearly all the schemes, the company - not you - benefits from any increases in the value of your home after you've taken up the scheme. Instead of one of these schemes, choose a home income plan.

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A Warning About Annuities

WARNING With annuities, you hand over a lump sum and in return get an income. You can't normally get your capital back as a lump sum. The size of the income you get depends on your sex and your age. Women have a greater life expectancy than men, so they get less income than a man of the same age. The older you are, the higher the income. Home income plans are a gamble: if you die shortly after taking out the plan, you'll have had very little of the income, but the whole of the loan has still to be repaid. But the plans can work to your advantage, as in the case of twins who were 100 years old in 1987.... see: A Warning About Annuities

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